Why cannot firms in perfect competition sustain supernormal profits in the long run?

Define key terms in the question:-The model of Perfect Competition describes a market where there is high degree of competition, with many buyers and sellers in the market.-Supernormal profit is the excess profit a firm makes above the minimum return necessary to keep a firm in business. This creates an incentive for other firms to enter the industry.To understand why a firm cannot make supernormal profits in a perfectly competitive market, it is important to understand what the key characteristics of perfectly competitive markets are:-as highlighted, there are many buyers and sellers in the market, none of whom are large enough to influence price (the Demand curve is therefore horizontal).-there are no barriers to entry or exit.Therefore, if supernormal profits are being made by firms, other firms will enter the market (no barriers to entry), causing a rightward shift in the supply of firms in the market. This will happen until the point where supernormal profits are eradicated. In the long-run, only normal profits can be made by firms operating in a perfectly competitive market.(Graphs are essential)

Answered by Maximilian F. Economics tutor

2733 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

If the market price of a good is above the equilibrium price, explain the chain of events that should occur to return the price of the good to equilibrium


Discuss the extent to which economic development in the resource-rich economies of sub-Saharan Africa is likely to be promoted by international trade


Why might a perfectly competitive firm make abnormal profit in the short run but only normal profit in the long run?


Does a higher NMW increase the distribution of income?


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2025

Terms & Conditions|Privacy Policy
Cookie Preferences